Investing, Asset Allocation, Economics & the Search for the Bottom Line

Industrial Production Rebounds In May

Industrial production in May rebounded sharply from April’s decline, the Federal Reserve reports. Output advanced 0.6% last month, a strong reversal to the upside after a 0.3% drop in the previous month. The manufacturing component also revived, growing 0.6% in May vs. a 0.1% slump in April. More importantly, the year-over-year trend in industrial production (and manufacturing) continues to show improvement. Although the latest crisis in Iraq and the resulting rise in oil prices introduce a new phase of uncertainty for analyzing macro risk, today’s upbeat news at least tells us that the industrial slice of the US economy has been humming along at a healthy clip.
Indeed, industrial production increased 4.3% over the past 12 months through May—the fastest pace in almost two years. “As the economy improves, so does the manufacturing sector,” says Harm Bandholz, chief U.S. economist at UniCredit Group. “It seems that the economy is gaining some momentum again.”

With most of the key economic indicators for May released, it’s clear that macro momentum has rebounded in the spring after the winter slowdown. That’s what Fed Chairman Janet Yellen said recently in testimony to Congress and today’s release adds another supporting data point to her analysis. But is this perspective already ancient and irrelevant history?

The question now is how (of if?) the macro outlook changes at a time of an escalating crisis in Iraq, Opec’s second-largest oil producer. Geopolitical risk via the Middle East is on the rise once more. Oil prices are higher, although so far (as of mid-morning New York time on Monday) there’s been no follow-through. The July 2014 contract for WTI crude oil is trading around $107/bbl, or roughly unchanged after last Thursday’s spike. It’s unclear if the worst is passed–or is this merely a prelude to even darker days and higher prices.

The good news is that the US economy rolls into the latest crisis with positive economic momentum. The great mystery is whether that will suffice as a buffer if the Iraq situation deteriorates further.